Some industries supply markets which are outside of the region. These
industries are crucial to the local economy and are called the economic
base of the region. This material covers the economic base model of a region
and the methodology of regional income and employment multipliers.
There are dynamic aspects as well as static aspects of the model.

An investigation of the economic bases of regions leads to questions
of what determines the location of industry. Alfred Weber
investigated
the factors in the location of industry associated with the cost of
transportation. Others, such as Christaller and
Auguste Lösch, looked at the
processes which establish regional systems of central places.

The relationships of the industries within a region are most easily
analyzed in the format of Leontieff's input-output analysis. This
methodology may also be extended to cover interregional relationships.
Gravity models also play a role in describing the relationships within a
region.

The economy of any major political unit is composed of regional economies.
These regional economies have a coherence as a result of the economic
relationships (linkages) among the parts. For example, the integrated
circuits industry in the Metropolitan San Jose (Silicon Valley) region
buy services and raw materials from other firms in the region. This is
called a backward linkage. There is also a forward linkage of the
integrated circuits industry to the region in that a significant share of
its output is sold to other firms in the region.

Labor market areas and housing market areas, which are concepts closely
related to the structure of a region, will also be covered. The course
will tie occupational labor market markets and residential housing markets
into the ethnic composition of the region and the socio-economic impacts
of policy decisions.

Regional economics also covers social accounting systems which measure
regional product and regional income. The conceptual problems and
information requirements make regional accounts more difficult than national
income accounting.

This model, which is fundamental to regional economics, is an elaboration
of the intuitive notion of a regional economy being based upon a
particular industry. Obviously the economy of San Jose and the rest of
Santa Clara County is based upon the electronics and computer industry.
Likewise the Seattle economy is based upon the aircraft manufacturing of
Boeing.

The economic base model says that there are some employment in a
region which is serving the local market and some employment which is
independent of the local market. This latter employment is called
Basic Employment. The other employment is called Local-Market-Serving
Employment. Local-Market-Serving Employment would include employment in
the supermarkets, department stores, medical offices, movie theatres,
local government offices and schools. Basic Employment includes, but is
not limited to, employment in industries that exports their products
outside of the region. An example of basic employment that is not an
export industry per se is tourism. In a sense tourism is sort of a
special type of export industry. Employment in federal government
agencies, such as the Federal Aviation Agency (FAA), is also basic
employment. Even employment in state government agencies can serve as
part of the economic base of a region. For example, an region in
upstate New York that was suffering from loss of jobs was given a state
prison to serve as part of its economic base. Generally basic employment
is any employment that is serving market outside of the region and
independent of the local market.

The economic base model can be formulated algebraically and is very
similar to macroeconomic models. There is an employment multiplier
analogous to the Keynesian multiplier in macroeconomic models.

One systematic method for identifying the economic base industries of a
region is the method of location quotients. Let qi be the
share of industry i in the total employment in the region and let
Qi be the share of industry i's employment in the nation.
The location quotient for industry i for the region, Li, is

Li = qi/Qi.

The theory is that if Li is greater than one then industry
i is part of the economic base of the region. If Li is less
than or equal to one then the industry is not part of the economic base.

Although the concept of the location quotient is reasonable and simple
it is not an error-free means for identifying the economic base. Some of
the problems with the theory are:

1. Local conditions may cause the location quotient for an industry
to be greater than one without it being part of the economic base, such as
the heating fuel business in cold climates.

2. A region may have an industry that is relatively more important
there than in nearby regions and consequently part of the economic base
even though its location quotient is less than one.

3. The national economy may be a net exporter or net importer of the
product of an industry and this would affect the interpretation of the
location quotient for this industry.